18 Sep 2020

State of Play: Changes to Australia's foreign investment framework

The Australian Government is planning significant changes to foreign investment laws which will greatly increase scrutiny of transactions which have national security implications, and give the Treasurer significant new powers to deal with them. These reforms are scheduled to take effect on 1 January 2021.  Kylie de Oliveira explains the key changes and the impact on foreign investors and their advisers.


To learn more about the key market trends and latest legal developments in Australia, visit our Australian Market: the state of play page.

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These are uncertain times, governments around the world are focussed on countering threats to national security.  It's not different in Australia.  Following similar moves by governments around the world, the Australian government is planning significant changes to foreign investment laws which will greatly increase scrutiny of transactions that have national security implications and give the treasurer significant new powers to deal with them.  The first of 2 exposure drafts of the legislation has been released by the government for public consultation and the second is expected to be released in September.  These reforms are scheduled to take place on the 1st of January 2021.

Today, we will touch on the new national security test under the Australian foreign investment law and some other proposed changes which will also be of interest to foreign investors and their advisers.  First, the introduction of the national security test.  Under the new laws, all proposed acquisitions of direct interests in national security businesses and interests in national security land will require notification to the Foreign Investment Review Board (FIRB).  This applies regardless of dollar value.  Starting a national security business will also require approval.  The big question is what is a national security business?  The definition is broad and includes businesses that are involved in critical infrastructure, telecommunications, the development, manufacture and supply of critical goods or services using defence and the collection, storage or maintenance of classified and other very sensitive information. 

One of the key issues with this definition is that it will not always be obvious based on publicly available information whether a business engages in these sorts of activities or is otherwise engaged in activities relating to Australia's national interest.  It's unclear to what extent an investor has to undertake enquiries to determine whether a proposed target falls within the new test.  The new laws will also give the treasurer extensive new powers in relation to transactions which give rise to national security concerns.  These powers are a call in power and a last resort power. 

A call in power gives the treasurer the ability to review a potentially unwind transactions which have not been reviewed by FIRB. And the last resort power gives the treasurer the ability to unwind transactions and impose new conditions where a deal has been considered and approved by FIRB but where the treasurer is satisfied that the result of the transaction was contrary to national security.  While we wait with interest for further guidance from the government as to the application of these new rules, it seems inevitable that the practical answer to some of these issues where there's a lack of clarity will often be if in doubt, lodge a notification.

Second, the government in these reforms has taken the opportunity to address what it regards as a number of integrity issues in the legislation.  For example, under these changes, investors may for the first time have to notify FIRB of increased shareholdings resulting from selective share buybacks in capital reductions and increased holdings in an offshore holding entity of an Australian entity.  Another change is a proposed streamlining of investments by funds which are under current laws deemed to be foreign government investors.  Under the proposed changes, investment funds with passive investors will either no longer be deemed as foreign government investors and will be able to apply for exemptions.  This means that the usual monetary thresholds for notification of transactions will apply rather than the zero dollar threshold currently applicable.  This is a change that is sure to be welcomed by private equity and institutional investors.

The third and final point that we're covering today is to mention the increase of reporting requirements imposed on investors under the proposed changes.  These will include reporting to FIRB regarding acquisitions that have closed, increased stakes, decreased stakes, disposals and other matters, with the reforms also introducing significant increases to civil and criminal penalties and giving the treasurer wide, new investigative powers. Compliance is an area that will require even more attention from foreign investors and their advisors in future.